The economics of seats at the cigar terrace at the Wellesley hotel

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August 13, 2014 by Paul Goldsmith

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Something that few people understand about restaurants is that rather than selling food, they are in fact selling space. More specifically, they are selling seats and tables. Therefore, anything that makes people sit at those seats and tables for longer needs to be charged for. It’s a reason why restaurants make such a margin on wine, because those who drink a bottle of wine are more likely to sit at their table for longer. Same with desserts. This is why it wasn’t a surprise when I heard that the Wellesley hotel has a minimum charge of £25 per person if you sit on their cigar terrace (the ‘crystal bar’) after 4pm.

Of course, the reason I know about this minimum charge is because of the work of Edward Heaton, a businessman who met two clients on the cigar terrace one afternoon, bought three small bottles of San Pellegrino (that cost about 60p per bottle in a supermarket) and was presented with a bill for £75 for them. Heaton says that there was no menu (the hotel says that the menus make the minimum charge clear), and the waitress said nothing when they just ordered the three waters. The hotel also says that guests are told about this minimum charge on arrival, so I imagine Mr Heaton may have just sat down without speaking to anyone. He didn’t complain when he got the bill, as he didn’t want to embarrass his companions, so he sent an email the week after. The hotel emailed back to apologise, but Mr Heaton appears to have involved the media…hence the appearance of his picture, holding three bottle of San Pellegrino, in quite a few online and offline newspapers.

Yet I’m not actually sure what Mr Heaton was expecting. The Cigar terrace at the Welleseley hotel is one of the most prime bits of real estate in the city. It is not free, the people who own the hotel will have paid a lot for that land and it is a privately owned piece of serenity in the middle of a busy city (which is why Edward Heaton wanted to take his business partners there in the first place). Hotels make money buy selling space,be it a room to sleep in, or, sometimes, a nice place to sit. After 4pm on a sunny day the ability to sit out there must be worth quite a bit of money. So it is should not be a surprise that the Wellesely feels that they have the right to out a price on anyone who wants to occupy that space. Their case is quite simple. If you want to sit on the terrace you are welcome to as long as you buy £25 worth of food or drinks. It’s a classic bit of economics, where a price is put on something that is a valuable scarce resource. Before a consumer ‘buys’ the space, they have to consider what it’s worth to them. Remember, they get some food and drink for their £25 too.

Anyway, apart from it being summer holidays, with not many stories about and newspapers like what they think are ‘wronged consumer’ stories, I can understand why the media were interested in Mr Heaton’s story. Yet what he has hopefully learned from the episode (and the man works in property so I’m surprised he didn’t know) is that when property is a scarce resource, it can have a hefty price on it. Seems fair enough to me.

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